Internet Brands, Inc. F2Q08 (Qtr End 06/30/08) Earnings Call Transcript

| About: Internet Brands (INET)

Internet Brands, Inc. (INET) Q2 2008 Earnings Call August 6, 2008 5:00 PM ET


Andrew Greenebaum – IR

Bob Brisco – CEO


Christa Quarles - Thomas Weisel Partners

Youssef Squali - Jefferies & Co.

Yun Kim - Pacific Growth Equities

Jason Helfstein - Oppenheimer & Co.

Colin Gillis - Canaccord Adams


Good afternoon ladies and gentlemen and welcome to the Internet Brands second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Andrew Greenebaum; please proceed.

Andrew Greenebaum

Good afternoon ladies and gentlemen and welcome to Internet Brands second quarter fiscal 2008 conference call.

By now everyone should have access to the second quarter fiscal 2008 earnings release which went out today at approximately 4:00 pm Eastern Time. If you’ve not received the release, it’s available on the Investor Relations portion of Internet Brands website at by clicking on the Investor tab. This call is being webcast and it is available for replay.

Before we begin today we’d like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed on them.

We refer all of you to the risk factors contained in Internet Brands most recent Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission, for a more detailed discussion of the factors which could cause actual results to differ materially as well as its first quarter results filed on Form 10-Q.

Internet Brands assumes no obligation to revise any forward-looking projection that may be made in today’s release or call.

With that I’d like to turn the call over to Bob Brisco, CEO.

Bob Brisco

Good afternoon, this quarter we have four pieces of good news. First we have strong second quarter financial results. Second we have good acquisitions news. Third we recently won new licensing installations that will positively impact our second half, and fourth as a result of all of the above we are reaffirming our full year financial guidance and lifting the bottom end of the revenue and EBITDA ranges. So I have a lot to cover.

I’ll begin with our consumer internet division and our progress in the second quarter. Our audience growth continues to exceed our plans. We now operate more than 200 total websites and 76 principal websites; those are ones which attract more than 100,000 unique visitors each month.

As a result of both organic growth and acquisitions our number of months of unique visitors has climbed to 37 million in June, that’s a 50% increase year-over-year. Our monthly paid views have grown to more than 600 million, a greater than 100% year-over-year increase. As a reminder, about 97% of our website visits are organic, that is from non-paid sources.

The advertiser side of our consumer internet business is also doing very well. In the second quarter despite continued softness in the automotive ecommerce sector, our total consumer internet revenues increased by 17% year-over-year. Consumer internet division revenues increased 11% in the second quarter on a sequential basis.

Our licensing division is also continuing to perform very well as we have recently won major new installations. In the second quarter licensing revenues increased 22% year-over-year. Sequentially licensing revenues decreased 17% in the quarter but this is a one quarter decline primarily the reflection of a $1.1 million benefit in the first quarter from the accelerated completion of a long-term project at Autodata.

In the second quarter Autodata won and began work on major new installations that will positively impact our second half. We expect the revenues from these projects to begin in the third quarter, grow in the fourth quarter, and continue thereafter on a multi year basis.

The other portion of our licensing division, vBulletin is also performing quite well. The business is showing strong year-over-year growth and we implemented moderate price increases in June. Now I will turn to our website acquisition strategy.

Earlier today we announced the acquisition of nine websites in the second quarter and one more since quarter end. These sites form the basis of two new verticals for us; shopping and careers. Our shopping vertical focuses on coupons and deals especially for high demand products, for example consumer electronics.

Coupons and deals are a booming area of internet activity, even more so in a soft economy. As with all of our sites, the vertical for shopping leverages our common operating platforms for managing traffic and building monetization.

Our new careers vertical also leverages our platform including our strength in content and community management. Our focus in careers is on careers with persistent labor shortages such as nursing, hospital jobs, aviation work, and truck drivers and so on. Or careers that are self-directed or self-employed. Examples include freelance workers or working at home jobs.

Again another area that is currently booming in the economy. We have provided a list of recently acquired websites that comprise these two new verticals in this morning’s press release. We are very happy with this set of new acquisitions. The two new verticals account for a large portion of internet advertising and we are confident of our ability to grow in both of these categories.

As I mentioned last quarter we are generally seeing more attractive acquisition prices due to a soft economy, that’s a trend that’s been continuing for us. Now let us speak in more depth about our financial information for the quarter.

Unfortunately our CFO Alexander Hansen is out of the country for a family need, and is not able to participate on the call. I will cover Alexander’s part here, for the Q&A I’ll be joined by our Controller Jamie Johns and our Director of Finance Megan Seaton, who several of you have met.

As I mentioned, total revenues for the quarter increased 18% year-over-year to a record $25.3 million for Internet Brands. This increase is comprised of a 17% increase in our consumer internet revenues and a 22% increase in our licensing division revenues.

Revenues for the first half of 2008 increased 24% compared to a year ago. This increase is comprised of a 15% increase in the consumer internet division and 48% in our licensing division.

Turning to expenses now, excluding stock-based compensation, total operating expenses for the second quarter of 2008 increased 24% over the second quarter of 2007. Sequentially those expenses increased only 1%, so EBITDA margins improved sequentially due to operating leverage in our business.

Net income attributable to common shareholders for the second quarter of 2008 was $2.9 million or $0.07 per diluted share compared to a $10 million net loss or $0.25 per diluted share last year. Net income for the first half of 2008 was $5.9 million or $0.13 per diluted share compared to a net loss of $6.7 million or $0.17 per share in the year ago period.

Adjusted EBITDA increased to $8.5 million, a record for our company, and a 20% increase in the second quarter of 2008 over the prior year. Sequentially EBITDA margins increased as we further leveraged our expenses against our expanding revenue base. Adjusted EBITDA for the first half of 2008 increased 27% to $16.4 million.

Turning to the balance sheet we ended the second quarter of 2008 with $58.8 million in cash and investments and we have no debt. During the second quarter we completed nine acquisitions as I mentioned in the consumer internet segment for an aggregate purchase price of $25.9 million.

In the first half in total we completed 21 website acquisitions for an aggregate purchase price of approximately $49.2 million. Net cash provided by operating activities in the second quarter of 2008 was $16.2 million. Now turning to guidance.

We are reaffirming our full year estimates and increasing the bottom end of the ranges. We now expect revenues for the full year to be in the range of $104 million to $110 million versus our previous guidance in the range of $100 million to $110 million.

We now expect adjusted EBITDA to be in the range of $33 million to $36 million versus our previous estimate of $32 million to $36 million. For the third quarter of 2008 we expect total revenues to be in the range of $26.5 million to $27.5 million and adjusted EBITDA to be in the range of $8.6 million to $9.3 million.

Please keep in mind that this guidance includes the impact of acquisitions. We are very pleased with how our business continues to develop. It was a good quarter and we’re shaping up well for the second half of the year. Now we’re ready to answer your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Christa Quarles - Thomas Weisel Partners

Christa Quarles - Thomas Weisel Partners

I was wondering if you could comment on the current environment and specifically if you’re seeing a distinction between CPC type advertising versus display i.e. CPM based advertising. And then on the acquisitions the average price seemed to be a bit higher this quarter then last quarter, was wondering if you could highlight any of the specific URLs that might be larger in nature. Obviously we can look and see what [Comscore] has to say and I’d like to get your commentary around couponing side given the problems that iClick has had with [Mezza] Media.

Bob Brisco

Starting with the generate environment for advertising right now, we are seeing I would say more strength, less relative strength in the display CPM side as you might expect and more relative strength in CPC, CPA, and also more subscription based models. We do a lot with small and medium sized business owners whether they’re vacation properties or apartment rental companies or auto after market players, folks like that. So that’s holding up very well, more of the sort of local businesses where the internet is their primary marketing channel.

We’re definitely seeing the strongest growth in those areas right now. We are anticipating as I mentioned in the prepared remarks that the economy is still going to be very soft in the second half and we’ve budgeted accordingly. Last year we saw Q4 come in a bit better then we would have expected so maybe that will happen again but we certainly think as a backdrop a bit soft, but again with our diversification now across so many sectors we see a lot of things still going pretty strong across all of our verticals.

Moving to the acquisitions the couple, yes the average size is larger than prior quarters by a little bit. The couple of largest ones that I point your attention to would be in the couponing space the ultimate coupon site, was an above average transaction site for us. Very strong site. Great search engine ranks. High monetization. Very strong EBITDA characteristics. Amongst the employment sites I’d point you to; actually I wouldn’t say any of them particularly stand out. They’re probably, most of them are in the average range but in the quarter the My Summer Camps acquisition in the travel and leisure vertical was the other large deal that we did in the quarter and I think we’ve spoken about that previously. Number one in its space by a large measure.

It’s a subscription based model, lots of room for upside with more penetration of the summer camp market. I think they’re only in the mid teens penetration of all the camps out there right now. And that’s been performing very well for us in the couple of months that we’ve had it.

Regarding the coupon space, we look at the market differently in that our vertical really focuses on being the principal with the consumer. We’re running the websites ourselves. We’re seeing these sites experience very rapid year-over-year growth. It ranges from 30% traffic growth to a couple hundred percent. I think there are a few things going on with those really high growth rates. One is obviously the soft economy and people looking for deals. Secondly we’ve acquired sites, four of them, and most of them are still rather young in their lifecycle.

So huge year-over-year traffic growth rates that they’ve been experiencing for quite awhile. And finally I think there’s a general trend, economy aside, of consumers becoming more aware of the discounts available online. The analogy I draw is for many years department stores ran discounts but at some point the white sale phenomenon was such that nobody ever bought anything in a department store without a coupon or a deal happening. I don’t think we’re there yet online which is sort of the good news to participate in this category the way that we are. We’re seeing large volumes of new people come in before they hit the transaction button on an online purchase and making sure that they’ve got the right coupon code, that they’re buying it from the lowest cost merchant or that they’ve gotten the right deal from somebody.

I think all of these sites are enjoying huge tailwind from that general trend.


Your next question comes from the line of Youssef Squali - Jefferies & Co.

Youssef Squali - Jefferies & Co.

I know from all the other companies that have reported or at least most of them, it seems that display has been weaker then expected, performance based marketing has proven to be a little stronger then expected, considering that you’ve been making a lot of acquisitions, if we were to try and I know we’ve gone through this before, but if we were to try to look at same store sales i.e. just looking at the sites that you’ve had for say over 12 months, is there a way for us to try to back into what an organic display business, display revenue growth was for you? And then just generally last quarter can you just give us an idea as to what was the split between CPM and CPC as a percentage of revenue?

Bob Brisco

On the organic growth rates of our properties, we previously guided that in the first year or two following acquisition which is by the way encapsulates almost all of the history we have of many of these acquisitions we experience growth rates on ad revenue in the high teens to 20% range. That’s still been consistent on deals we’ve done that are now hitting their first anniversary. I’m not able to parse that between CPM and performance based with metrics I have at hand right now. I don’t think we’d find a different rate though if we looked at it.

But what I’d guide you to there are many of these sites that we’ve acquired had very little direct CPM advertising on them so we’ve unleashed our sales forces to convert that inventory from ad network place to direct sold. We’ve had some pretty big pick ups in revenue; in fact the CPM side might be a little bit higher simply because of where we are in the monetization curve on those sites.

Youssef Squali - Jefferies & Co.

Were there any areas that were strong this quarter? You pointed to the weaker ones, which ones were actually stronger then you expected?

Bob Brisco

I can give you a little bit of color; the automotive dealer business was at the softer end. The automotive OEM business was solid and a bit towards the strong end of what we might have expected. The travel category was solid across the board. As you know we’re not so airline focused, we’re mostly about lodging and longer [tail] destinations. So that performed well. And we did well in the home category. The apartment sector was very strong for us once again and then our home repair business was also strong.

That one I’d point you towards a great example of those sites didn’t have the home repair site in particular, didn’t have much direct sold CPM advertising on it when we acquired it about a year and a quarter ago and we’ve had some success in starting to bring advertisers on that on a direct CPM basis. So generally we found the environment to be still good for internet advertising and only the pockets that you’d think that might be soft, things like home mortgage which is less then 1% of our revenue and then auto dealers were the two areas that were softer.

Youssef Squali - Jefferies & Co.

If I look at your cash from operations for the first half, I think it was $16.2 million, last year it was $17 million on 25% more revenues, can you walk us through that and then with regards to the acquisitions you seem to obviously be making more or at least spending more money then that $20 million quarter that you had initially talked about. How should we be thinking about that going forward, how much more cash or how much longer can this cash position carry you?

Bob Brisco

First on the cash flow for the first half, we did a bit over $16 million in operating cash flow in the first half of this year compared to $17 million last year. EBITDA for the first half of this year was also just a bit over $16 so cash flow equaling EBITDA is how you should generally think about us. So I would point to last year where we did $17 million of free cash flow against about $12 million of EBITDA in the first half as the exception. And the reason, I’ll explain last year’s variance, we had a particularly strong progress in moving down working capital requirement through better AR collection in the first half of last year and that drove that $5 million plus, that drove the vast majority of the plus $5 million gap between EBITDA.

I think our cash flow generation is very strong relative to EBITDA and revenues and I’ll think you’ll continue to see that going forward. Those are just timing issues there. On the acquisition spending, yes, we’ve guided in the range of $20 million a quarter and if you look at the first half we came in closer to $25 million because we were at $49 million and change total for the first half of the year. We would generally guide that the $20 million is still the right number. So the next question could become so does that mean you’ll spend less in the second half of the year then the first half? And the answer is we don’t know yet.

We might, I would guide that we’re unlikely to spend as much in the second half as we did in the first half. We were very pleased with the opportunities we saw and while our pipeline is still strong I think we’ll probably be closer to the $20 million guidance per quarter for the next couple of quarters, might be a bit lower or might not be depending on exactly what we see. Then extending your question out to the future if we continue to spend on acquisition investing on the order of $20 million a quarter we have plenty of cash on the balance sheet and getting generated out of free cash flow to take us well into next year, let’s call it maybe the half way mark of next year.

We announced in our press release though I didn’t talk about it in the call that we’re in discussions with several lenders about a credit facility. The credit facility would be under quite favorable terms. We’d be looking for less then 1x EBITDA. Obviously we don’t need it for about a year but we’ll probably go ahead and put it in place because we want to be very clear about the company has no plans to take on any dilution through equity at share prices that remotely resemble where we closed for instance this evening.

So we think a modest like 1x EBITDA credit line takes us all the way home in terms of what our investment program is and acquisitions for many, many years if not forever.


Your next question comes from the line of Yun Kim - Pacific Growth Equities

Yun Kim - Pacific Growth Equities

Can you just talk about the visibility you have in your consumer internet business the second half of the year, how are you managing that aspect of the business and the softness of the environment out there for display advertising, are you converting more of your inventory towards CPP, PPA, or targeting different advertise base, running any specials, or anything like that and then also how much of your growth in your business is simply given by better monetization of your past acquisitions. I think you put it out like some sites you were just simply able to sell more [inaudible] inventory regardless of the CPM rates.

Bob Brisco

We think our visibility is very high for the second half of the year. The vast majority of our consumer internet revenues are recurring either annually or month to month so we’re typically have line of site on 85% to 90% of revenues looking out even a couple of quarters ahead. Actually if you’re only looking out, now we’re only two months to the beginning of the fourth quarter I’d guide to 90% visibility. And the last piece tends to be rather predictable; the spot markets tend to come in in narrow ranges. So we feel quite good, quite strong about the visibility for the second half.

This is the second question I’ve been asked about the mix of revenues, the mix between CPM, CPA, and subscription based advertising revenue and I’ll describe it as other ad network pieces, we’re relatively flat across four or five different revenue streams on the advertising model. So as an example CPM, none of the single types that I describe would represent more than 25% or 30% of our revenues. CPM would be in that range of the 20% range and same with CPA, same with various types of subscriptions and same type of all other which would be ad network and other types of arrangements we have.

So very diversified and we actually had a good quarter on CPM advertising. I do think the environment is soggy for that generally out there so we’re being cautious in how we budget for the second half of the year on that specific piece but otherwise we’re seeing things be very firm.

Yun Kim - Pacific Growth Equities

On the acquisitions, can you talk a little more on your entry into the shopping vertical, from my understanding that vertical is less driven by advertising and more driven by traffic acquisition fees and extensive use of affiliates, which is somewhat counter to your core business model that [isn’t merely] based on monetizing and organic traffic, can you comment on your strategic rational to get into that vertical?

Bob Brisco

Regarding the vertical itself we’re excited about it because it’s so large and it under [tins] a lot of what we’re doing in the other categories. We did some things in consumer electronics, a lot of home repair, a lot of what people purchase are around core consumer categories and core home related categories so from a content and management and user side of the business it was very familiar to us and is one of the largest categories that we were not active in yet.

On the advertising side of the business, you’re exactly right that the mix of revenues is different then our historic base and tends to be much more affiliate driven. We view managing the ad affiliate networks as very similar to how we think about ad networks. So most of these sites we’re acquiring typically had one monetization source and we will add more to them. We’re also discovering as we look at all of the sites we already own the affiliate opportunities that we have imbedded in them that we really hadn’t gotten to yet. So we see some reverse synergies if you will of taking some of the strong positions we’ve acquired with affiliate networks and mapping that monetization back on our 37 million uniques and the other websites and categories that we’re already in.

So we’re excited about that category not only for itself but I think its going to give us some lift across the board on many of our websites.

Yun Kim - Pacific Growth Equities

Can you give us a status update on how the vBulletin acquisition has been performing? I think it’s been a year. I know you already mentioned that it is doing well, but can you give us any additional color, like any new initiatives besides price increases that you’re planning on to better monetize on the installed base or any other improvements that you could bring into that business?

Bob Brisco

The growth rate of the business is strong. I would guide you to better then our company wide average. So we’re pleased with how it’s performed since we’ve acquired it in the first 12 months. The bottom line performance I would say is even better still then that. We’ve got as you’d expect very high operating leverage because of the software nature of that business. From the product perspective we launched new features in the first half of the year, a couple of releases in the 3.7 series, they included better blogging tools, much stronger social networking tools and some other project tools with the software kit. Right now we are deep into product planning and requirement development for the next phase of vBulletin which has been going under the project name VB4. We’ll probably come up with something a bit more glamorous then that when we get closer to release.

That’s a longer term project so you won’t see it this year. You’ll see it sometime next year. We haven’t locked in on a release date for that yet. The evolution of that product in four will be the biggest leap that its ever taken in that we’re thinking through and developing our way into a much more robust application that deals not only with bulletin boards and blogging and social media but better content management and better monetization tools and techniques that we think are available with any other software out there.

And as you alluded to, we’re thinking through and modeling right now how we’re going to go to market in terms of revenue model with that and I think the answer will be it will be a hybrid of different approaches the affect of which will be much higher yields from our customer base then we’ve realized so far.

Yun Kim - Pacific Growth Equities

Has the renewal rate been steady since the modest price increase?

Bob Brisco

Yes we took the increase in June and we had a good June and July. Yes, it’s holding well overall.


Your next question comes from the line of Jason Helfstein - Oppenheimer & Co.

Jason Helfstein - Oppenheimer & Co.

What percent of your inventory would you say is being sold in the spot market and for your non-spot market inventory, what would you say the average lead time or the average contract length is, which I understand they’re constantly renewing but what the average time is.

Bob Brisco

The average contract length would be the better part of a year. A large portion of our revenues run on annual contracts. Those that don’t tend to be more CPC driven. I don’t know how to blend that in. Those are more day to day or week to week or month to month. So I’d guide you that the vast bulk of the revenues are out on year contracts and not calendar years, just whenever the year started for the advertiser and then put 20% or 30% waiting at the other end of the barbell, pretty short, like a month at a time. So that probably gives you a median or a mean of eight months or something like that.


Your final question comes from the line of Colin Gillis - Canaccord Adams

Colin Gillis - Canaccord Adams

Can you just talk about the relative levels of monetization on the new verticals that you entered? Where you’d rank them, shopping and careers?

Bob Brisco

The shopping vertical has very strong monetization so I’d put it right at the top of the mountain of what we see across all of our verticals. Obviously consumer lending, consumer finance, is very high, probably at the very highest along with certain aspects of automotive and shopping is right there, probably right at the next rung.

The employment vertical I would put into two pieces, the job board and listings piece which is more akin to what a Monster or Career Builder would do is also right at the top, very, very high revenues per unique. On the more community side of what we’re doing in the careers sector you’ll see a much lower blended average. I’d put some of that at the lower end of what we see. It could be higher then say maybe general site on travel community say, because career is monetized well but it wouldn’t be anywhere near the level of what you’d see on the core listings part of an employment site or some of the other ecommerce related.

Colin Gillis - Canaccord Adams

Given the pace of acquisitions in the quarter are you seeing an increased willingness to sell among owners?

Bob Brisco

Generally speaking yes. We would comment that this year has been a much, we’ve been very active in the first half of the year because we had a strong pipeline as we always do and the seller willingness to transact was more favorable then in the prior couple of years and I’d say materially so. It felt different. It felt strong. We’re very happy with what we’ve acquired. We like the economics basis for what we acquired. Having said that I think that will continue and as you know we’re very prudent as we go so I’m looking at all things considered as we do deals, what’s the quality, what’s the pricing, how’s my management team doing in terms of absorbing all of the different pieces we’re bringing onboard, and its sort of an all-in analysis but generally yes, tailwind in terms of us being able to move along with our strategy even a bit faster then we had hoped.

Colin Gillis - Canaccord Adams

So if you have that three year look, this may be one of the better years to do the build out?

Bob Brisco

Yes, I think if you look back a couple and probably look ahead a couple, my guess is the period we’re in now and I don’t have the crystal ball on the economy, but yes I think with the virtue of hindsight that’s right. This window that we’re probably six months into and who knows may go another six months or a year, will have turned out to be a very opportunistic time I think.

Colin Gillis - Canaccord Adams

Should we expect any more verticals this year, or is it just going to be a build out of the existing ones?

Bob Brisco

We’re not sure. Being engaged in what we have we currently, don’t expect to see one from us next quarter in Q3. I don’t want to rule out Q4. We don’t have plans one way or another yet that would let me indicate for sure. So I’d guide probably somewhere between Q4 and sometime next year I’d expect to see another one from us, but I wouldn’t expect to see anything in the next four months.


There are no further questions at this time; I would like to turn the call back over to Bob Brisco for any closing remarks.

Bob Brisco

We’d like to thank everyone for being with us today. As you can tell we had another strong quarter and we feel like we have great visibility on the second half of the year and that’s setting us very well for the long-term as well. We’re confident about where we head in 2009 as well. Thank you everyone for your time and we look forward to keeping in touch with all of you.

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